Knowledge that Transforms

Decision rules for stabilization policy in an open economy are examined under alternative specifications of the balance of payments. In particular, distinction between interest-sensitive debt capital and equity capital which responds to an activity variable alters the comparative static properties of instrument assignment. Various aspects of dynamic adjustment are further investigated in a context in which time is endogenous and in which the decision process minimizes a criterion function. It is shown that traditional one-to-one pairing of targets and controls may be inferior to assignment of clusters of instruments to some targets for specified time intervals.

[Excerpt] Although a government employer may be the only employer of a particular class of employees in an area (say firemen), it does not necessarily follow that the government agency possesses monopsony power, as current or potential employees can find employment in alternative occupations in the private sector. Moreover, a model is presented in this paper that indicates that the existence of persistent vacancy rates for a class of employees is compatible with there being a greater number of applicants than there are positions, at a wage rate that is predetermined either through a legislative process or collective bargaining. In particular, if applicants vary in quality, then under certain conditions a rational government employer will choose to employ fewer employees than his assumed predetermined authorized employment level. That is, the employer will choose an optimal equilibrium positive vacancy rate.